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Does allowing Huawei to build Europe’s 5G network pose a threat to international security? And to what lengths should the US go to help Huawei’s European competitors? On this episode, AEI’s Claude Barfield discusses the race to build the world’s 5G backbone and how the Trump administration should police Chinese intellectual property theft.
Claude Barfield is a resident scholar at AEI and a former consultant to the office of the US Trade Representative. He has written extensively about 5G, China, and Huawei. What follows is a lightly edited transcript of our conversation. You can download the episode by clicking the link above, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.
PETHOKOUKIS: As we’re talking we are in the last full week of March. The US-China trade conflict is ongoing. It seems that every few days, it sounds like there’s been some progress made and then it appears that progress has not been made. Broadly, where do you think we are at in this trade conflict and how you see it playing out over the next few months?
BARFIELD: Well, I’m not sure how it will play out. I think where we are is that Mr. Lighthizer is trying to keep the president on track. The US trade representative, Robert Lighthizer, is trying to keep the president on track to back him in pushing for structural reforms in China related to regulations that hurt foreign companies, while using US companies, IP theft, and forced technology transfer and to keep that on the table as opposed to just being bought off by the Chinese who promised to buy more agricultural products. It’s up in the air whether or not that will succeed.
There’s a tension there that the president, as I’ve heard in many of his speeches, seems focused on the bilateral trade deficit between the two countries. He wants them to buy more, maybe a lot more, of our stuff — soybeans and other things as well. Yet, there’s also a wing of the administration that wants these other kinds of changes. They really want a much different trading relationship and they want also a change in the Chinese economy. They want to try to push it to be a little bit more market-oriented, less subsidies of business, that kind of thing. You have two paths that would seem to be in conflict. It would seem to be easier to get a deal on the one about China buying more stuff.
I would say that it’s not just within the administration. I think the business community, although it has to be careful, particularly those multinationals who want to do business in China, backs the administration and backs Mr. Lighthizer, the US Trade Representative. It’s also true that the president is being pushed by, of all things, the Democrats in Congress who are sending letters. They’re playing this hypocritically, but they’re pushing the president, ‘don’t give in, don’t just sell out in terms of wheat or soybeans.’ And so, I think it’s within the administration, but it’s also outside of the administration. There are others who think — and they might disagree with the way the administration got into it with tariffs or whatever — but now we’re in it, we have to be really strategic. It’s not just a trade but I think a strategic set of negotiations. If we walk away from it, we’re actually handing a lot of the future in terms of technology to the Chinese.
Do you have any sense, whether just by observing the president, or talking to anybody, where the president’s mind is on this? I think certainly coming into it, again, the focus was on trade deficits, something he’s been talking about for decades. Do you think he has accepted this more strategic rationale that that’s what should be the purpose of what’s happening right now with trade and these tariffs? That that’s where we need to be going?
I make no claims to know anything internally. I’ve been a critic of the administration, so I don’t have any internal knowledge. It’s like other things in trade, the president has been partially persuaded parallel to his instincts and sometimes against his instincts that the deeper structural questions related to China are important. But his instincts are and have always been to look at the trade balance, the trade deficit. Also you have to realize that the president, I think at this point we’re speaking right as introductions of the Mueller report have come out, and things are going pretty well, so he’s got to think about the election of 2020, but he’s not in a terrible position. He still thinks, I think, he needs or would like to have some kind of trade agreement that he can trumpet with the Chinese. So you have those not necessarily conflicting, but at least competing, elements in his mind. He knows and is aware I think — Trump’s not a stupid guy, he may be an intellectually lazy one, but he’s not a stupid guy — he knows what the issues are here. It’s just a question and to be fair to him, any president would have this kind of pull and tug in the year before his re-election campaign.
He also seems focused a lot on the stock market. It seems like investors have sort of assumed that there’ll be some sort of deal which, at the very least, would not involve more tariffs or higher tariffs and preferably a reduction of some or all the existing tariffs. That seems sort of baked into the cake and in, at least how I read it, people’s expectations. Because it also seems that China is very interested in getting these tariffs removed. Even though the tariffs might not be the main thing driving the Chinese economy, but they don’t seem inconsequential.
Xi Jinping has been under increasing pressure as the year has gone on, and since the end of last year. You asked me originally how I thought it would play out –– I don’t know the answer to that exactly, but I think one thing if you think as I do that the structural issues are the most important, you’re probably not going to be able to get a signing on the dotted line for everything and see that everything actually will change. I think the best outcome, from my perspective, even though I’m not happy about how we got here — but given that the tariffs are now in place — I think Lighthizer is right, and the president actually seems to have backed him last week, to keep the tariffs in place even after an agreement because then you need to see if the Chinese promises are fulfilled. For instance, promises that they will change regulations that really hurts US corporations and other corporations, or that they will change their laws about intellectual property as well as stop the theft of intellectual property, you won’t know that when we first make the deal. So Lighthizer is pushing for some sort of mechanism that would lift the tariffs when the United States would see that the Chinese are actually following through on their word, which they have not often done in the past, and then be able to even retaliate further if they do not. Now, there are those who don’t think that enforcement can work and it’s going to be difficult. I mean we’re not talking about just changing a tariff, we’re talking about looking at the regulatory process within China or within any nation, it will be difficult to track, but I think that’s where we are and I think Lighthizer at least in this case — though I tend to disagree with him on a lot of things — is right in terms of how you proceed if you get a deal. The enforcement of that deal will stretch out over months and years.
It’s going to take a long-term commitment by the United States to continue to monitor and be willing to hold China responsibly to the fire. What are the stakes here? You talk about a strategic interest. What is the interest? Is it US economic power? Is it technology? What is the national security component? When we talk strategy, what are we really talking about and what are the big stakes here?
Without sounding like this is some sort of beginning of the end of the world — and I’m not dumping on soybean farmers or wheat farmers — but the things we’re talking about in terms of the future of the internet, of the fifth generation rolling out of mobile, these are the future of the United States and other countries. I think we have to put ourselves in a position to be able to compete fairly in these particular sectors and across this spectrum of technologies. I think that is the important thing. It does have obvious national security implications because with 5G you really do get this situation in terms of the internet where you can get all kinds of espionage — and we’ve had continuing trouble with the Chinese in terms of espionage, economic espionage, and just your run-of-the-mill espionage that everybody participates in. This starts as a trade negotiation, but it certainly has national security implications and ultimately, I think it has strategic implications in the sense that other nations are watching the United States as to how we react and how we challenge, or choose not to challenge, China.
A lot of this seems to revolve around the Chinese telecommunications company Huawei. It is one of their tech giants and we’re very concerned that it is playing too big a role in the creation of this next generation of wireless technology. We’re concerned about the espionage issue. Fundamentally is the concern that Huawei is a legitimate national security concern, or as I think the Chinese suggest, is this all about the US trying to remain economically dominant and trying to hold down China’s rise as an economic and technological competitor?
In relation to Huawei itself, I don’t think this is the symbol of the United States trying to keep the Chinese down, and I think there are legitimate national security issues related to Huawei. What Huawei is, and what it is in terms of what we’ve been talking about in 5G, it has emerged in the last two decades and certainly in the last decade as the premier company to provide the equipment for the base of the internet, the routers, the network fundamentals if you will, and with 5G. I mean this was true with the earlier wireless generations, but with 5G it becomes much more difficult to track the ability of the Chinese government, should it choose to do so, to enter into these networks and to put either malware on them or to just be spying on our actions. 5G, without getting into a lot of technical detail, is in one sense just multiple microprocessors and when you get into the so-called “Internet of Things” where you’re talking about automobiles and other mobile devices, you will have thousands or millions of different devices that will be interconnected and so it’s going to be very difficult, particularly if you don’t control the base of the structure of the internet, to track that.
To me, it does not seem to be an unreasonable argument that you would not want to have the company that is building the next generation internet infrastructure to be located in a country with an authoritarian or totalitarian government, and which only seems to be becoming more so rather than becoming a more market-democratic economy. To have that company running, really, the premier communications infrastructure that underlays the global economy, it doesn’t seem a crazy notion that that would be of concern. Yet, people will say ‘well, the Chinese government has promised they’re not going to interfere, Huawei says we don’t give information, who would ever buy their products again if that were the concern?’ But this isn’t a French company, it’s not a German company. It’s a Chinese company. I don’t see how you negate that concern despite all these promises.
Well, I think there are a couple things. One of the things to keep in mind, to go back to the point you made earlier, and that is that the Chinese are saying that this is just us trying to hold them down and this is the United States pushing its own companies. As we say in the vernacular, we have no dog in this fight. The ironic thing is that in terms of building the base structure, the base corporations, there is no US corporation competing. We are actually dependent on two European corporations, Ericsson and Nokia, as substitutes. We can talk a little bit more about why the United States is in this situation where we’ve reached a point where Erickson, and particularly Nokia, are in some difficulty internally. We have to ask, are they going to be adequate substitutes? And if they’re not, what do you do? The administration has not really faced up to that.
The choice is between two companies facing some measure of difficulty and a company which seems completely healthy. They seem to be making great products at a great cost, but it’s hard to fundamentally trust them.
That’s true and the other thing that the Chinese say, and Huawei keeps coming back to again and again — and it’s true so far as we know — there’s been no evidence that the Chinese government has actually intervened and done anything in terms of the networks or in terms of base structure being offered by Huawei. The problem with that though, is that we are just beginning 5G. 5G is not here yet and the point I made that this has become infinitely more difficult to track and to be aware of what would happen or to be on top of what would happen is still in the future. So for Huawei to say nothing has happened yet, and I am one who blasted Congress and others years ago for having without any evidence whatsoever said that this was happening. Under Obama they looked very carefully — as a matter of fact the NSA had the ability and still does, to rummage all through Huawei’s communication such as the communication of Chinese government between 2011 and 2012, and they didn’t really find anything. But that doesn’t really help us now because it’s the future you have to worry about and the future is much more complicated and it would be much more difficult to track. Additionally, the administration for over a year, first quietly, and then in the last four or five months really vocally has been warning particularly our European allies and particularly NATO allies that if they accept Huawei equipment for 5G, it would make it very difficult to communicate in terms of secure communications among NATO nations and with the United States. The Supreme Allied Commander General Scaparrotti just last week was asked about this up in the House Armed Services Committee, and he said there’s just no way we could do that and he also added that if the individual countries accept Huawei and Huawei is also part of whatever secure communication system they have, then we would have to cut security sharing off entirely.
Why aren’t Europeans as concerned?
They are concerned but here you get a trap, maybe it’s not a trap but it’s a difficult decision. Huawei doesn’t control all of the individual national networks in Europe, but it has a very strong presence and it’s going to be there. That puts you with two problems. One, it is going to be very expensive to rip out Huawei equipment and put in new equipment and it would also cause all kinds of problems if you’re used to Huawei equipment and then you try to switch over to Ericsson and Nokia, that’s going to be difficult. The other thing is that the Europeans are worried about the fact that Huawei actually has better equipment that’s cheaper. We have the same problem, by the way. Ironically, we are using Nokia and Ericsson. Are you hurting yourself technologically? The administration is increasingly warning the European countries, but it is not untypical of the Europeans that they just can’t get their act together. It looks as if we’re losing actually. Merkel and the French, they bow in our direction, but they for a variety of reasons don’t want completely to ban Huawei, not least because they, like our companies, want to compete in the Chinese market. One final point here is that I think for the administration, a really major blow came some weeks ago, when the Brits who are part of the Five Eyes, which is a group of five countries that we have a special security relationship with — also including Canada, Australia, and New Zealand — announced that it looks as if they’re moving toward not banning Huawei. British Telecom has a lot of Huawei equipment and even though it said that it would not use some of it in the inner parts of the 5G, it’s still going to use it. That really is a blow to the United States in terms of security. Now, we are meeting with the Five Eye nations sometime in the next week or two, but we’ll just have to see what’s happening there.
Has there been any talk about, if we’re concerned that you have this dominant Chinese company and the western competitors are not as strong, creating some sort of consortium? We had Airbus to counter Boeing. Maybe there should be a western consortium to create our own stronger, healthier company to create this telecommunications and internet equipment.
About a year ago there was a proposal that came out of the National Security Council all of a sudden that talked about nationalizing. It was not clearly defined at the time what nationalizing meant for 5G. We have since had former speaker Newt Gingrich and others who have talked about changing the way we auction the spectrum. But it has all been kind of lumped together with the idea of nationalization. One thing to keep in mind is that if you start de novo, you’re not going to create a new Huawei. Huawei is two decades old in terms of its growth and also, as I said, we don’t have a dog in this fight.
In the past when we perceived that we had fallen behind in technology, for example with semiconductors in the early 1980s, we thought we needed to just directly create a competitor.
But we never actually did that fully. Here you’d actually have to directly create a competitor if you want them in the US, and there are no companies that would actually be ready to step forward. With regards to semiconductor example you mentioned, we created SEMATECH, but at that time we already had very sophisticated companies and semiconductors and it was just a question of getting them together.
They weren’t starting at a blank slate then?
You didn’t start with a new semiconductor industry, and so I think the alternative would be –– and there’s been some talk of this but I don’t know how far it’s gone — would be to somehow shore up either or both Ericsson and Nokia. That would be an extraordinary situation, although it’s not impossible to imagine, where the United States is intervening with government funds or some sort of government action to help two foreign companies. That idea hasn’t gotten very far but there have been news articles that within the Defense Department, they’re considering how do we help those two companies.
How concerned are you about the national security implications? We sort of outlined some of the potential risks, things people are worried about. As you’ve been looking at it, how concerned would you be to have Huawei running the internet backbone in the next 25 years?
As someone who ridiculed or thought in 2011, 2012 that yes, it was a problem, but I didn’t think it was that much of a problem because at the time we’d already scrubbed down and looked through all of the connections between Huawei and the Chinese government. I’m much more concerned now. I changed my mind because the technology has changed. As I said, and as we’ve gone over, 5G is just going to be so much more difficult to track. It may also be, I should say, impossible even if we get Ericsson and Nokia as substitutes and we have them build the base of the network. 5G is going to be really difficult in terms of keeping track of where things are and where things are going and where you can insert malware and where you can actually get into the system. I think even if that’s the case, ultimately, I think it is necessary and proper to do what you can to deal with the one company that you know could be the biggest problem.
Just to take a step back, it seems that we look at this as sort of a race. There’s a technology race. There’s a 5G race. There’s an artificial intelligence race. That we are in this race with China, which to me suggests a kind of Cold War framing like the space race. That this is an either/or proposition. Do you think that is the right way to view the 5G race, the AI race, this technology race between the US and China, or is that not the right metaphor? It would seem to me that if China does create technologies that are better — they might have their areas of specialty, we might have ours — that there ia some mutual benefit from China becoming a more technologically advanced nation, or is it they win, we lose or we lose, they win?
I think with China you do have a different situation and I suppose in some ways, it’s not different from the Soviets in the late ‘50s and early ‘60s where the moon race really galvanized the United States beyond just the technologies related to the moon race. For me, it’s the question of yes, it is a race, but it’s then a question of how you handle it. You don’t panic. There’s some sense of panic in these proposals that have come out about nationalizing 5G. Let’s be clear, this is an authoritarian, and as you said a potentially totalitarian government, and the new technologies are already allowing the Chinese to have greater control over their population and you’re seeing other authoritarian governments use the same kinds of technology, facial recognition or tracking. This is beyond just economics. These are technologies that are part of this new mobile 5G world that we’re moving into, so I certainly think there is some necessity to be concerned. As I say, I disagree with a lot of what the Trump Administration does on trade, but in terms of China and the way they’ve handled it so far, to go back to where we were at the beginning, I’m rarely if ever on Mr. Lighthizer’s side, but as I’ve written, I am on his side in terms in terms of China.
I don’t think we’re going to change the entire Chinese government. We’re not going to change their centrally planned economic system anytime soon, so what can we reasonably expect for a change in Chinese behavior? Whether it’s them subsidizing companies or stealing, forced technology transfer, intellectual property — what can we reasonably expect and is the impact of those reasonable expectations significant?
It is hard to know where this is going to end, but I think the most important thing for the United States — and here I would fault the Trump administration — is that to take the worst-case scenario, we could be moving to a world in which you’ve really got two big systems. Just take the internet for a moment, we could end up with two internets and there will be a Chinese internet and a US or western internet. But we haven’t gotten to that point yet, the Chinese are saying that they are not challenging the so-called liberal world order and in terms of trade, the World Trade Organization. But on this, I think we ought to just sit for the moment and for the immediate future hold them to their word. They say they want to compete fairly and that they are not trying to give any special privileges to Chinese corporations. There you can hold them to account on questions of technology transfer and subsidies and terms of regulatory policy because they are members of the WTO. That gets us back to the situation of the WTO where again, the administration starts behind the eight ball because it’s been so critical.
They’re not that much interested in the WTO.
That’s right, but I think it could very well be that you’re heading in the WTO toward something called plurilateral agreements, where the United States could try to pull the nations who really want liberal trade and liberal investment to new sets of rules related to subsidies, related to government intervention in terms of regulation, and in terms of data or digital trade. I think the administration ought to continue the way it’s going in terms of China, but it also ought to — even though I’m skeptical of the Europeans getting their act together — at least try to have them at the table, and the Japanese also, so that you do have a core of nations that generally agree about a future of 5G world order in terms of digital trade rules and in terms of advanced technology rules that affect trade and investment. It could be that we end up not being able to do that. It could be that the world is going to split, but we’re not there yet and that makes these negotiations quite critical. We must realize that the Chinese formally still say they want to be a part of the existing world trade and investment system. I think we ought to play that out and just see where it goes for the moment.
As far as the enforcement mechanism, should the stick be tariffs? Should we be going after individual Chinese companies that we feel are breaking these rules, that are engaged in tech IP theft? What should be the punitive aspect?
It should be a panoply of issues and I would say that there are those, and even my colleague Derek Scissors here at AEI, who don’t think the enforcement is not going to be possible. Derek may be right, but I think that Lighthizer is right to try this. Where we don’t disagree is this: In terms of intellectual property, if a Chinese company is found having participated in some sort of theft or — and here we have to be more vigilant in following this ourselves — using some technology or system that they’ve stolen, I would ban them from the US market. I would ban them and I would go after them in capital markets around the world. If the Chinese, for instance, continue to refuse to allow real competition and particular sectors are closed off for investment, I would ban the Chinese companies here and again, I would go after them in capital markets. In other words, I think it’s the investment side that is more productive and from the beginning has always been more productive, for me, than the tariffs.
We’ve got the tariffs and I know the administration. There’s nothing I can do about the fact that Trump is president. He likes to use tariffs. I don’t like tariffs, but they’re going to use them and if you have to have a weapon you would use them. However, because the World Trade Organization’s rules are very limited about investment and because I think it’s less of a problem, that’s the way I would go in terms of enforcement. It may very well be that it’s tough to enforce something like that when you get down into it. It’s not like when they have violated a tariff. That’s easy to see. It can be much harder to see what the regulation that they put in place is doing. The classic example that has emerged in the last few months is cloud services where it is really virtually impossible to compete fairly in China both in terms of economic competition but also from the fact that you have to have a Chinese partner and have to go to the Chinese government. Those are the things I would focus on and we may fail, but we should be clear about the sanctions we are going to put on them if we find that this is continuing.
This is a question that came up at a recent conference I was at. Would you dissuade or ban American technology companies from engaging in research in China that could help the Chinese industry eventually, or maybe even have military applications? Would you allow American companies to set up advanced AI research centers in China?
This has come up specifically with Google and the Defense Department. US generals have criticized Google. Google is in a particularly bad situation because it walked away from at least one big contract with the DoD because the top of the company folded under pressure from some disgruntled employees. That’s one place where I wouldn’t have a blanket or across the board policy. For example, if universities — and I probably would be in the minority here — are receiving funding from China for basic research questions where they’re publishing articles, I find that less of a problem. If it’s something that is moving toward applied technology and some sort of demonstration, and that case clearly has security implications, or could in the future, then I think you have to be much more careful.
What’s the unhappy ending here both with the trade conflict and just the overall economic relationship between China and the United States over the coming years? If it goes south.
Well, there’s several. It could be, as we talked about before here, that we just settle for some extra soybeans and wheat, and that’s a real defeat for the United States. The other bad situation would be that it ends in disgruntlement on both sides and disaffection and anger and more tariffs. As I say, this is not the way I would go, but I think this is the way this administration would go.
Can you see us working in a mutually beneficial way with China that assumes China is going to become more important economically and technologically, but that’s okay because we can’t stop that and we need to focus also on ourselves becoming more competitive?
Well as a general rule, and know I’m showing my age in all kinds of ways, this was my reaction when we went through the same thing with Japan. But now when we look back on it, it was much less vital in terms of security, but what you just said was my reaction at the time. I thought we ought to look internally first, with the whole US-Japan conflict in the ‘80s and early ‘90s. The problems that I thought we had then were problems at home. At the time we worried that the Japanese were going to take over the world. It’s much more complex now because, unlike Japan, China is going to be the number one economy in the world at some point in the next decade or two. They may have their own problems, and that’s the other thing to be aware of, that they are creating problems for themselves internally and Xi Jinping knows that. But the situation was very different with Japan as Japan was never going to be, or at least not for any foreseeable future, a strategic competitor with the US and a potential foe to the United States. We’d already gotten past that in the 1930s and ‘40s. With China, it’s very different. It could be a long-term strategic competitor. Just to go back to something in trade as we’re getting close to the end here — the so-called liberal trading order, the world trading system after the Second World War, accommodated state intervention. The GATT and the WTO did not say you have to rid yourself of all public companies. As a matter of fact, in the ‘40s and ‘50s as Europe was rebuilding, as Japan was rebuilding, you had government control or government intervention across the board. As late as early 1980, President Mitterrand in France nationalized the entire banking system in France. The French learned a lesson from that. But it wasn’t that you hadn’t had government intervention before, that wasn’t a new thing for the US to face. What we have not faced before, and this gets I think to the nub of the issue, is a country as large as China is and is going to continue to be with an authoritarian state centered system. This is a system in which the control of the Communist party is the key here, and so when we talk to Xi Jinping or we argue to him ‘you’ve got to do something about The Great Firewall, because it uses an industrial policy tool’ or when we say, ‘you’ve got to do something about the subsidies to these high technology are defense-related and sometimes non-defense related companies’ — he doesn’t see this as an economic issue, he sees this as central to the continued control of Chinese society in the future, so it’s very difficult to change his mind. This is not just a trade issue. You face a situation where for the Chinese government this is a political issue and an existential issue for their survival.
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