Digital Cold War

(Bloomberg) -- Here’s one vision of the future: In half the world, driverless cars built by Baidu and connected by Huawei’s 5G wireless networks carry passengers who shop online with Alibaba and post selfies on WeChat. In the other half, those activities are dominated by companies like Amazon, Google, Facebook, Tesla and Ericsson. On one side, the internet is tightly controlled; on the other, it’s freer. For some policy makers and academics, the tensions between the U.S. and China are pointing toward a “Cold War 2.0,” one fought for technological, rather than nuclear or ideological, dominance. It’s a prospect fraught with danger, fueled by hawks on both sides. Yet it would require so complete a dismantling of the global supply chains and networks that have underpinned China’s astounding growth in particular, that many believe any new Cold War won’t end up looking like the last.

The Situation

Amid an escalating trade war, U.S. President Donald Trump’s administration has begun adding Chinese technology companies to its Entity List, which blocks foreign companies deemed a security risk from buying U.S. goods. The most notable entry was Huawei Technologies Co. The move, later relaxed, threatened to cripple China’s largest technology company and accelerate the country’s drive for technological self-sufficiency. The salvo came after months of efforts by the U.S. to persuade other countries to avoid using Huawei for new 5G networks and after Canada, acting on a U.S. request, arrested Meng Wanzhou, Huawei’s chief financial officer, on U.S. charges of violating sanctions that limit trade with Iran. The arrest is widely believed to have prompted China to detain two Canadians in retaliation. While foreign companies have long complained of difficulties operating in China, now the U.S. is proposing a new, Cold War-reminiscent export control regime to restrict the transfer of cutting-edge U.S. technologies. Trump also signed an order giving priority to research on artificial intelligence amid fears that the U.S. might fall behind in a technology with military as well as commercial significance. Meanwhile, decisions by Vietnam and Thailand to adopt tough cybersecurity laws modeled on China’s appeared to confirm a gradual division of the global internet into zones of governance.

The Background

According to writer, artificial intelligence scientist and former Google China head Kai-Fu Lee, Beijing had a “Sputnik moment’’ in 2017, when Google’s AlphaGo computer program defeated a champion of the 2,500-year-old Chinese game Go. As with the 1957 Soviet satellite launch that shocked the U.S. into a space race, AlphaGo’s victory triggered an all-out Chinese drive to become the world’s leading AI power by 2030. The state has mobilized huge sums in investment and subsidies for state-owned and private companies to achieve its goal, and is moving to replace all foreign-made computer hardware from public sector offices. It has also been accused of forcing Western companies doing business there to share their intellectual property with local partners. For Americans, Huawei’s emergence as the global leader in 5G network equipment produced a similar shock. According to a leaked memo, the White House considered nationalizing the buildout of 5G to protect it from Chinese infiltration and compared the race for AI to the Manhattan Project, which built the atom bombs that ended World War II. The U.S. classified China as a “strategic competitor” in 2018, the European Union followed suit and in 2019, NATO for the first time added to its formal agenda a discussion of the challenges posed by China. U.S. demands in its trade war with China include that the country address issues from market access restrictions to intellectual property theft that are seen as giving it unfair advantages in the tech race.

The Argument

Former U.S. Treasury Secretary Hank Paulson predicts a new “Economic Iron Curtain,” while Wired magazine editor Nicholas Thompson and the political scientist Ian Bremmer picture a world where countries must choose between technological ecospheres. Yet there’s reason for skepticism. The U.S. has had limited success persuading allies to block Huawei from their 5G networks, where excluding it would mean delays and higher costs. And while the Soviet Union, America’s Cold War foe, was economically isolated, China is deeply integrated into the global economy. The Vietnam example is probably misleading; Hanoi may share Beijing’s authoritarian views on internet freedom, but the Vietnamese government also sees China as its biggest security threat and will not use Huawei in its 5G networks. So if a new digital curtain does emerge, it may be so porous and meandering that it could hardly be called iron. For its part, China has rejected U.S. security claims over Huawei, calling them concocted and a pretext to hold back the country’s technological rise.

The Reference Shelf 

• AI Superpowers: China, Silicon Valley and the New World Order, a  book by Kai-Fu Lee.
• ​Hank Paulson’s address on the risks of a U.S.-China Cold War at Bloomberg’s 2018 New Economy Forum.
• 2019 annual report of the U.K.’s Huawei Cyber Security Evaluation Centre.
• “The AI Cold War that Threatens Us All,” a Wired magazine article by Nicholas Thompson and Ian Bremmer.
• QuickTakes on blacklisting entities, 5G mobile networks and how cybersovereignty splits the once world wide web.
• Video: China’s vision of a censored internet is spreading.

To contact the editor responsible for this QuickTake: John O'Neil at joneil18@bloomberg.net, Andy Reinhardt

©2019 Bloomberg L.P.