The ‘Clean network to safeguard US Assets’ aka the new Firewall being proudly touted by Mike Pompeo and as discussed on the blog here last month is likely to have some important and largely unintended consequences.
The announcement this week that it is Larry Ellison and Oracle rather than Microsoft that is going to be buying TikTok rather obscures the issue of why TikTok is for sale in the first place. Basically if it wants to operate in the US, it has to be owned by Americans. In some ways one could argue that this is no different to China preventing US corporations from operating in China, but this in turn misses two points. First, TikTok agreed to follow all US rules and regulations in the US, while Facebook (for example) would give no such undertaking in China. Second, it distracts from the point that in doing this, the US is essentially (more than) copying China and after years of criticising ‘The Great Firewall of China” is building its own (no doubt big and beautiful) Firewall. This will have significant commercial and economic implications, regardless of who is in the White House this time next year.
The motives look different as well. For example, a VPN is not illegal in China, suggesting that rather than simply wanting to limit access to information, China is instead limiting the ability of US corporations to extract income from Chinese consumers, either directly or indirectly. As the old saying goes, if you aren’t paying for the product, then you are the product. China simply doesn’t want US tech companies selling information about Chinese consumers to other companies. This is consistent with a broader policy of controlling who gets access to China’s domestic markets. Most multinationals, used to the standard ‘Washington Consensus’ model of exploiting emerging markets, had simply assumed access to China as a matter of ‘right’ which is why previously they had been so ‘pro-China’. Many are still struggling to deal with the fact that things don’t seem to be working that way. Nor will they. The tariff Element of the New Cold War will seriously limit growth prospects in China for US multinationals.
By contrast, the US rationale for the TikTok takeover is one of ‘national security’. As with Huawei, the argument is not a commercial privacy one, but a national security privacy one. China, we are told, will use the Huawei hardware and the TikTok software to ‘spy’ on US citizens. This is somewhat dubious – after all we now know from the Snowden papers and wikileaks that the NSA are literally listening to and recording everybody in the US all the time. Perhaps they are worried more that these alternative hardware and software platforms will limit their ability to do that? After all one of the primary jobs of the internal intelligence service is to monitor its own citizens, not the citizens of other countries.
Apple may make a virtue of how it won’t pass on your information (and famously refused to let security agencies have ‘backdoor’ access to its phones) but unless you actively disable multiple levels of software, then the device does in fact allow multiple third parties access to that information, in all practical terms without your knowledge. Indeed, a large amount, even the majority in many cases, of evidence in criminal cases now comes from the phones of those on trial. When discussing something with Siri enabled (but not asking Siri directly) it is entirely possible that your conversation is recorded on your phone and available to google or Facebook or Instagram. And they make no promises about your information. Indeed it is something of a parlour game for teenagers to talk out loud about wanting to buy something and then see how long it takes for an advert to appear on Instagram.
The TikTok move is not unconnected with the moves against ZTE last year and most obviously Huawei in recent months up to and including the use of sanction threats to essentially cut off their access to the latest chip sets, meaning that the Chinese are accordingly being forced to try and manufacture their own. This clearly has an element of commercial motivation, but actually risks making things worse for US manufacturers and tech companies in the medium to long term. Sure, Chinese progress may be slowed for a while as a result, but they won’t be stopped entirely and ultimately the demand from China’s 1.3bn consumers is going to be met from domestic suppliers.
There are parallels here with the banking system post the GFC. Up until 2008, China has relied heavily on the western banking system to fund its growth, its own giant State Owned Enterprise (SOE) banks being primarily there to lend at favourable rates to other large SOEs. However, post crisis and the freezing up of the western liquidity and banking system, China was forced to look to an internal, domestic solution and while the trials and errors of the 2009/2010 period were well documented, the reality is that, ten years on, the western banks have largely lost China.
The same is likely to happen with western technology suppliers, China is rapidly upscaling its production abilities. They are undoubtedly behind at the moment, but in many senses the US is cashing in its chips (sic) here, for by doing this now to ‘protect’ their home market, they are closing off the export potential of the China market permanently.
The New Cold War also means that, going forward, China is going to decouple further from the US/West as it can’t risk unilateral sanctions. As China reduces its exposure to the $ this means a retreat from other US assets, especially the bond markets. This also means accelerating its work on a CHIPS payment system to run in parallel and ultimately replace the US SWIFT system as well as further international-isation of the Yuan, almost certainly with a blockchain digital setup. This will further cement Chinese leadership in most areas of consumer fintech. Meanwhile, the prospect of any US companies getting new approvals to operate in China in finance, IT, (and fintech), healthcare and education are slim to none.
All this of course will also have implications for inflation. For years the US and the west have benefited from what was known as the China price. Everything China wanted to buy went up in price (great for exporters), while everything they wanted to sell went down in price (great for consumers). This is the, often misunderstood, benefit of free trade; not that exporters make overseas earnings, but that consumers have access to cheaper and/or better quality products and services. Tariffs, trade wars and sanctions reverse all that. US foreign policy is cutting exporters off from their biggest potential market while taking away competition for consumers in their home markets and allowing pricing power to shift.
Bottom line. The New Cold War with China is starting to ripple through western economies in ways hardly anticipated by the military/political axis driving policy – albeit probably understood by some of the cheerleaders on the sidelines. The new digital firewall is the latest iteration of this and marks a new level of disconnect by the US from China – and the world. Regardless of who is in the White House, US consumers will increasingly see less choice and higher prices, while US and western exporters will find themselves increasingly shut out of the world’s biggest and fastest growing consumer market. More important perhaps, by forcing China to seek independent solutions in areas previously benefiting from free trade, western governments will create greater future competitive threats.
