Last year, the United States Commerce Department amended its direct product rule to limit China’s Huawei Technologies’ access to advanced microprocessors – chipsets that are critical to virtually all of the company’s equipment and services. The US agency also denied Huawei a general license extension, further limiting the company’s access to American products and services. These actions were just part of the escalating confrontation between Washington and Beijing over 5th-Generation (5G) wireless networks.
China is responding with threats to place Apple, Boeing, and other US firms on its own “unreliable entities list,” which would constrain their business in China and likely be followed by monopoly and cybersecurity investigations. Many business and political leaders in the United States, China, and elsewhere believe both nations are recklessly endangering the global telecommunications market and the broader geopolitical relationship. Certainly, each country has a lot to lose if relations worsen; so then, what justifies this 5G brinkmanship?
Put simply: This geopolitical competition over 5G will determine who shapes the fundamentals of the new economic order and who builds the technical infrastructure of modern governance.
The Central Nervous system of the New Economy
An IHS Markit study estimates 5G will create more than $13 trillion in new economic value by 2035, and that it will create more than 22 million jobs in the 5G global value chain alone. This value is about a lot more than just faster phones.
The fundamental value proposition of 5G is that it promises decisive improvements in five key areas: mobile broadband, ultra-reliable low latency communications, massive machine-type communications, power efficiency, and security. These improvements, realized in unison, will create networks that finally have the capacity to generate, process, move, store, and secure the data of a truly connected world – and to reap the benefits of this world.
For example, before the deployment of 4G and 4G/LTE wireless networks, wireless networks could not process data fast enough to allow services like Uber or Lift. But, once deployed, these networks allowed real-time geopositioned tracking of individuals and drivers, at scale, and gave rise to a “sharing economy” that is currently projected to be worth $335 billion by 2025. The performance gains from 4G to 5G dwarf those experienced between 3G and 4G and we simply have not yet imagined many of the innovations that will follow.
Beyond the innovations themselves, these networks will also finally enable the “internet-of-things,” a world where the internet is no longer a place you go, but is instead, an ever-present reality that is assumed – in the same way you assume air conditioning when walking into a modern office building. Virtually everything will be a sensor that generates data and insights. Artificial intelligence (AI) will then leverage this data to predict user needs, to find ever-more efficient operations, to combine new and old information for novel applications, and to enable data-heavy innovations like autonomous travel. This data rich environment will likely, in-turn, generate even more sophisticated AI algorithms that will further expand the opportunities and capacities of individuals and societies – including governments.
The Technical Foundation of Modern Governance
The United States and China offer competing models of governance and both recognize 5G’s ability to further their respective visions. The United States prioritizes free market capitalism and sees the promises of 5G as a means of enabling a new epoch of American technological leadership that advances human economic and political thriving domestically and around the world. China, on the other hand, understands next-generation wireless networks as essential for realizing its vision of governance, where the prosperity of state-run capitalism is combined with the stability and security of technologically enabled authoritarianism. Both nations are correct, and both intend to export their respective models to like-minded nations.
Even more, the interconnected world of 5G – with its many promises – also comes laden with many threats. It is undeniable that defending nations means defending networks and that defending networks means paying attention to who builds them. Even more so when all of these networks connect with one another. These concerns are at the heart of US restrictions on Huawei, who is a proven extension of China’s intelligence enterprise.
All of this creates a context for 5G that holds great promise, great import, and great consequence. Even more, the outcome of the 5G race will set the conditions for other equally consequential technology struggles between the US and China – such as robotics, autonomous vehicles, and advanced manufacturing. Washington and Beijing know this and are competing accordingly. The outcome of this competition, however, is far from clear.
Here are three scenarios for how this competition might resolve in the mid- to long-term.
First, China could dominate the global 5G market. The United States is making clear that it will not allow Chinese companies to build its domestic 5G networks. But, American capacity to convince other nations to follow suit has been uneven and Huawei already has 1/3 of all global 5G handsets. To date, more than 35 nations have inked 5G agreements with Huawei, including key US allies France, Germany, and Italy. While some speculate that Beijing’s missteps during the COVID-19 crisis will reverse some of these decisions, these speculations have not yet become formal policy changes.
It is also true that Huawei is the only company that can unilaterally develop, deploy, and manage an entire 5G network. Telecommunication companies Nokia and Ericsson have alternative offerings, but much of their supply chain remains in China and neither company can compete with Huawei’s artificially low prices – often about a third of the cost of Nokia and Ericsson due to China’s heavy government subsidies. No US company is building global 5G networks.
The possibility of a Chinese dominated 5G market is a medium-probability, high-impact scenario because none of the fundamental variables are changing and because it is possible that China’s telecommunications lead may not be overcome in the near- to mid-term. That is not to say, however, that this leadership is unassailable.
A second scenario would be for the United States to rally and reassert itself. Historically, first-movers have enjoyed significant advantages when shifting between wireless generations. This is because they gain billions in revenue, spur new job creation, and set the standards and practices for all who follow. Even so, on occasion, late entrants can be opportunistic and can position themselves for future leadership – and the United States has done this before.
Europe, led by Germany, held the competitive advantage in 2G, allowing Ericsson and Nokia to field better devices and to transition to 3G in the 2000s while the United States was still rolling out 2G. But these companies were hamstrung by regulations and Japan assumed leadership of 3G. The United States eventually caught up with Japan, but it took years and was very expensive. But, because of these investments, the United States had a head start on 4G and has dominated this latest generation of wireless networks. Unfortunately, this leadership has waned and much of the Western world is now playing catchup with China.
While Washington is actively looking for alternatives and is trying to slow China’s 5G advancement, it may simply be too little too late, making this no more than a medium probability, high impact scenario.
A third scenario is perhaps the most likely, but it is also the most disruptive and concerning scenario. Global wireless networks, and therefore the internet itself, could fracture into competing spheres of influence.
As has been discussed above, Washington and Beijing have two increasingly different notions of modern governance, but both understand networks as being critical for securing and spreading those visions. In much the same way that the world was divided into competing spheres of influence between the West and the Soviet Union during the Cold War, the world’s networks may soon be divided between a Western and Chinese internet – each with its own norms, rules, and infrastructure. China, Russia, and others are already building regional internets in the name of cybersecurity and there is little the United States can do to prevent these efforts from maturing.
American bans on Chinese companies like ZTE and Huawei are being mirrored by Chinese bans on Western equipment and these telltale signs may rightly be understood as hallmarks of the new “splinternet.” Only time will tell.
In conclusion, the 5G competition between the United States and China has roots and implications reaching far beyond mobile phones. Both Washington and Beijing understand they are shaping the contours of tomorrow’s economic and political landscape and both nations are signaling their commitment to winning this contest. No matter the outcome, significant global change is occurring, and it will all be streamed by our mobile devices.
This article originally appeared in a report for Geopolitical Intelligence Services.