Is the US trying to break up the internet to contain Huawei and stay ahead of China?

With its actions against Huawei, the US is effectively threatening to segregate the internet. Chinese companies have operated at a speed and scale that threatens US dominance in tech, and Washington’s response will shape the knowledge economy

Andrew Sheng

Published: 1:00am, 22 Jun 2019

Why you can trust SCMP

It is a cliché to say that we live in a digital age, with many countries upgrading to become knowledge economies. There is also supposedly a digital divide, between those who have access to technology and those who do not.

But the United States’ recent action against Huawei – under a Trump administration order, the Chinese technology giant might lose access to future versions of the Android operating system for smartphones – suggests a real divide is in the making. The internet might break up into digital networks that are perhaps firewalled against each other, amid a situation of geopolitical rivalry, technological competition and seriously different governance values.

Lest we forget, the internet was created by computer scientists for the US defence community, and individuals were allowed to develop the technology behind the information superhighway through innovations in hardware, software and data transfer. (The World Wide Web, an information retrieval system, was one such innovation.)

Internet stakeholders, including Google and the non-profit Internet Engineering Task Force, collectively maintain what has become the critical infrastructure for global communication and social media.

It is a complex network that does not have a single architect, but grows through the continuous tinkering by web participants and the linking up of domestic networks and, today, smartphones. The internet forms the basis for the worldwide knowledge economy, through which knowledge is created and shared.

Globalisation took a long time to take off, but essentially there are three levels of networks that facilitated the exchange of goods and services, capital and knowledge.

At the level of goods and services, free trade has enabled the global exports of merchandise and commercial services, which reached a total value of US$46 billion in 2017, or 57 per cent of world GDP.

Physical trade is dwarfed, however, by the foreign exchange market, where trillions are traded in a single day. And, in an era where just about anything can be transmitted over the internet, the McKinsey Global Institute estimates that cross-border flows of data have grown 45 times in the decade to 2014 and will grow a further nine times by 2021.

US-China trade war pushes world economy closer to the edge

What the trade war has revealed is that the US, a major player in global trade, finance and the internet, is rethinking its game under the rubric of “America first”.

Specifically, not only has it weaponised tariffs and imposed sanctions limiting trade with its enemies in dollars, it is also effectively threatening to segregate the internet and new 5G cellular networks with its actions against Chinese providers ZTE and Huawei.

Traditionally, there are two ways to deal with a system threatened by excessively volatile feedback: throw sand in the wheels, or modularise the system. The first approach is about keeping the speed of a system at safe levels, so that no accelerating flywheel comes loose and smashes the system to bits.

For example, in the 1970s, Nobel-winning economist James Tobin proposed the “Tobin tax”, essentially a financial transactions tax to reduce the volatility of floating exchange rates and discourage currency speculation. The Europeans have proposed a version of the tax.

The second approach is about breaking a system into separate modules that can operate independently, so that the failure of one module will not bring about the failure of another.

The remarkable rise of Chinese tech platforms has been achieved through their ability to operate at speed and scale. They innovate faster than competitors, achieve critical mass because of the size of the Chinese market, and link up markets that were previously segmented.

In other words, the platforms cut across and link markets such as logistics and finance (Alibaba) or consumer games and social networks (WeChat). (Alibaba is the owner of the South China Morning Post.)

Two ideas define the impact of technology on business models. By Moore’s Law, basic measures of computing technology grow exponentially over time. Metcalfe’s Law holds that the value of telecommunications networks grows as more people use them.

The WeChat story: how Tencent's super-app changed China

Taken together, technology changes the rules of the game – whoever reaches a bigger market faster becomes the dominant player.

In the knowledge economy, the winner will have competitors breathing down its neck and replicating its knowledge at almost zero cost; it can only stay ahead by investing heavily in research and development, and generating new knowledge.

This is why Huawei is such a threat to American dominance of the internet. If the Chinese dominate the infrastructure of the new 5G data networks at speed and scale, then all American systems can be marginalised or worse, crippled through cyberattacks. The recent shutdown of Russian power networks by a reported US cyberattack shows the reality of such threats.

Deciding how to address such a threat is clearly a watershed moment in the knowledge economy. Modularisation would reduce the scale and distribution of knowledge, creating higher costs and barriers to innovation.

The Japanese are set to propose a model called Data Free Flow with Trust at the G20 summit in Osaka at the end of this month. This draws on a chapter on e-commerce in the Trans-Pacific Partnership, which the US has unfortunately abandoned.

With its actions against Huawei, the US is effectively attempting to break up the internet, and this could prove as disastrous as Brexit. Will the internet become the “splinternet” – a Balkanised, protectionist world under “America first”? How this plays out will decide whether we enter an age of artificial intelligence or human stupidity.

Andrew Sheng writes on global issues from an Asian perspective

Post